Q: I am 29 years old, and my husband and I bought our first house in June 2008 for $240,000 using the first-time homebuyer tax credit. It is now being appraised for about $190,000 and we have about $224,000 left on our mortgage.

My husband was the major breadwinner, and my salary went to pay utilities and groceries. My husband passed away unexpectedly about two weeks ago. We have no savings and my monthly salary alone will barely pay the mortgage, not even mentioning all the other house expenses.

I have been in contact with our mortgage company, which is supposed to be sending out information to start the loan modification program which could take three to four months. I would like to eventually sell the house because of all the memories associated with it, but my three years aren’t up until June.

Do I have any other options? I have excellent credit and don’t want anything to happen on that end.

A: First of all, we’re sorry for your loss. It’s hard enough to lose a loved one, especially at such a young age, and then have to deal with the financial hardship associated with that loss.

Given your situation, you would hope that the IRS would understand and give you a break. But the first-time homebuyer tax credit that you obtained in 2008 was actually a loan to you by the IRS. If you purchased and got the credit in later years, the credit was not treated in the same way, and you’d still have to repay the credit under certain circumstances.

So your tax credit must be repaid over time with each of your annual income tax returns; if you sell the home, you become liable for the balance of the amount you owe. Your tax credit was $7,500, and you are expected to repay that credit over 15 years while this home remains your primary residence.

Since your husband passed away and he was responsible for some of the repayment, the IRS rules provide that you will only have to repay your half of the tax credit. If you stay in the home, it appears that your obligation to repay the first time home buyer’s tax credit for 2008 will be limited to your share of the credit, but only if you and your spouse filed your income taxes jointly in prior years.

For more information, you should review “Instructions for Form 5405” on the Internal Revenue web site at www.IRS.gov.

On the issue of the loan modification, the banks’ record has been rather poor. As you have indicated that your income barely covers the current mortgage expenses, it may be likely that the bank won’t give you a loan modification. They may deem your income too low to cover the mortgage expenses, real estate taxes and insurance for the home along with your living expenses.

You should know that many lenders will ask troubled borrowers to participate temporarily in a loan modification program, only to tell them later that they don’t qualify for a permanent loan modification. But in the interim, while the borrower is in the temporary loan modification, credit history gets dinged.

Banks justify their practice of reporting borrowers negatively during these temporary loan modifications by claiming that the borrowers aren’t making their required payments. If the borrowers don’t pay what the loan documents say is owed, the banks report them as having paid less than they should have. After a couple of months of this process, homeowners realize that their credit score has suffered and their credit history has taken a turn for the worse.

If you are able to get a permanent loan modification, count yourself lucky.

However, if it appears that the expenses of the home, even with a drastic loan modification, won’t allow you to stay in the property, you might want to consider selling the home sooner rather than later.

Given the situation you describe, your sale will be a short sale – that is, you will sell the home for less than what you owe the bank. Your worries aren’t with repaying the first time home buyer tax credit, but with selling the house, getting out from the debt you owe, and moving on without destroying yourself financially.

If you find a buyer for the home, you will then need to ask the lender to approve the short sale. By approving the short sale, the lender agrees to take less than what is owed to release its mortgage from the home. If the lender refuses to release the mortgage, you can’t sell the home. If the lender does agree to the short sale, then you need to see if the lender will also agree to forgo any right to pursue you for the balance owed on the mortgage. If the lender agrees to this, you move on without the burden of owing the bank money. If it doesn’t release you, the bank can still sue you for what is owed.

If the bank decides to go after you, it can send the debt to collections, obtain a judgment against you, garnish your wages and take other measures to collect a debt. It may decide to waive the deficiency given your circumstances. In any case, bankruptcy may be an option.

Once you go down the path of a short sale, you need to understand that your credit score will take a sizable hit. The lender has the right to report you to the credit reporting bureaus that they have agreed to accept less than the full amount owed on the mortgage loan in the short sale. In some cases, your credit score could go down by 150 points or more. A drop in your credit score at this point is the least of your worries.

You’ve lost a husband, and you don’t want to destroy your financial life as well. Talk to someone you trust (or a knowledgeable real estate attorney) to walk through your financial picture, understand what expenses you have, what your income is and what you should do to prepare yourself for the coming months.

Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call Ilyce’s radio show at 800-972-8255 any Sunday, from 8 a.m.

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